Microfinance Company Registration in India

A microfinance company is a financial institution that provides small loans, often called microcredit, and other financial services to low-income individuals and communities that traditional banks typically overlook. These include farmers, daily wage earners, small shopkeepers, and women entrepreneurs who often lack credit history or collateral.

The core aim of microfinance companies is to promote financial inclusion. They bridge the gap left by conventional banking systems by offering accessible financial support in the form of small, collateral-free loans.

Microfinance plays a critical role in India’s socio-economic development. By facilitating self-employment, job creation, and community upliftment, these companies directly contribute to poverty reduction and local economic growth. Women, in particular, benefit significantly, as microfinance supports their entrepreneurship and boosts their financial independence.

Whether you're looking to create social impact or build a sustainable finance model for the underserved, registering a microfinance company in India is the first step.

Did you know? In the last year alone, microfinance institutions in India disbursed over ₹4.2 lakh crore in loans, reaching nearly 8 crore borrowers, a testament to their transformative impact on the nation's financial landscape.

Microfinance plays a crucial role in empowering underserved communities by providing them access to essential financial services. Unlike traditional banks, microfinance companies cater specifically to low-income individuals, those without steady employment, formal income records, or collateral. These institutions fill a significant gap in the financial system by offering small, collateral-free loans designed to help people start or expand businesses, manage daily expenses, or deal with emergencies.

At their core, microfinance institutions:

• Focus on access: They reach people in unbanked and remote areas who lack access to formal services.
• Remove entry barriers: Microloans are typically collateral-free, making them accessible to those with no assets or formal income records.
• Prioritize women borrowers: Women are often prioritized, helping drive community-wide impact through female entrepreneurship.
• Encourage group support: Group lending and peer accountability ensure high repayment rates and encourage collective progress.
  Provide ongoing support: They offer financial literacy, flexible EMIs, and other support services that foster long-term self-reliance.

Role of Microfinance in India’s Economy

Microfinance is a pillar of India’s financial inclusion strategy. With a large segment of the population employed in informal sectors, many Indians lack access to formal credit or savings platforms. Microfinance institutions (MFIs) step in to bridge this gap, especially in rural and semi-urban areas.

• Reaches the Unbanked: Over 190 million Indians still lack access to formal banking; MFIs bring services directly to them.
• Supports Informal Sector Workers: Farmers, hawkers, artisans, and daily wage earners benefit immensely.
• Fuels Grassroots Development: Loans are used for income-generating activities that directly improve household income.
• Drives Women-Led Growth: About 95% of microfinance clients are women, leading to stronger community development outcomes.
• Reduces Dependency on Moneylenders: Microloans offer a safer and more transparent alternative to high-interest informal lending.
• Promotes Economic Equity: Builds a more balanced financial ecosystem by giving everyone a chance to grow.
• Impact at a Glance: In FY2023, India’s microfinance sector disbursed over ₹4.2 lakh crore in loans to nearly 8 crore borrowers, proving its immense role in shaping a more inclusive and empowered nation.

There are two primary legal structures for establishing a microfinance company in India. Each one has its own rules, money requirements, and how big the operations can be.

• NBFC-MFI

An NBFC-MFI stands for Non-Banking Financial Company – Microfinance Institution. These are companies that are officially set up under the Companies Act, 2013, and regulated by the Reserve Bank of India (RBI). If you plan to run a microfinance business that makes a profit, operates on a bigger scale, and can get a good amount of money from different sources, then becoming an NBFC-MFI is the right choice. This setup allows you to lend money commercially, but it comes with stricter rules you have to follow and needs a good amount of starting money, called a Net Owned Fund (NOF).

• The Section 8 Company for Micro-Credit Activities

A Section 8 company is registered under a special rule, Section 8 of the Companies Act, 2013. Unlike an NBFC-MFI, a Section 8 company is set up for non-profit reasons. This means its goal is to help society, like promoting art, science, education, social welfare, or charity. If your main aim is to create a social impact and help people get financial services without giving out profits to the owners, then a Section 8 company is a great choice for doing micro-credit work. These types of companies generally have fewer direct rules from the RBI for their micro-credit activities, especially if they don't get too big, which often makes them easier and quicker to start.

• "Microfinance" vs. "Micro-Credit"

It's helpful to understand the specific difference between "microfinance" and "micro-credit," as people often use them like they mean the same thing, but they don't quite.

So, while all micro-credit is part of microfinance, microfinance is much more than just micro-credit. A Section 8 company usually focuses on providing micro-credit as a key part of its larger goal to help society.

• NBFC-MFI vs. Section 8 Company

Deciding between an NBFC-MFI and a Section 8 company for your microfinance company registration means looking at what you want to achieve and what resources you have.

Therefore, if you want to do large-scale lending to make a profit, an NBFC-MFI is the way to go. If your main goal is to help society and people through micro-credit without focusing on profit, a Section 8 company is a better fit.

Before you can even think about providing microloans or other financial services, there are some essential things you need to have in place. Think of these as the building blocks for your future company.

Foundational Requirement: Company Incorporation

No matter which path you choose for your microfinance business, whether it's a for-profit one or a non-profit one, the very first step is to officially create your company. This means you'll need to register it under the Companies Act, 2013, with the Ministry of Corporate Affairs (MCA). It’s like giving your business a legal birth certificate. You'll need at least two directors and two shareholders to start a private limited company, and one of the directors must be an Indian resident. This incorporation makes your business a legal entity, separate from you, ready to operate.

Specific Prerequisites for an NBFC-MFI

If you choose to be an NBFC-MFI, which is generally a for-profit type of microfinance business, the rules are a bit stricter because you'll be dealing with more money and under the direct eye of the RBI.

• Minimum Net Owned Fund (NOF): A critical prerequisite for an NBFC-MFI is maintaining a minimum Net Owned Fund (NOF) of ₹5 crore. Think of NOF as the actual money the company truly owns, after taking away its debts and any fancy brand values or goodwill. It shows that your company is financially strong and can handle its operations. If your company is in the Northeastern states of India, this requirement is a bit lower, at ₹2 crore, to encourage growth in those regions.
• Director Experience: The RBI mandates that directors possess relevant experience in financial services to ensure sound and responsible management. So, at least some of your directors should have good experience in the financial services world, like banking or finance. This helps ensure that the company is managed wisely and responsibly.
• RBI Approval: After your company is officially set up and meets the NOF and other requirements, you cannot start lending money until you get a special Certificate of Registration (CoR) from the RBI. This is like getting their official stamp of approval to operate as a microfinance institution.

Specific Prerequisites for a Section 8 Company

If your dream is to start a microfinance company mainly to help people and not to make a profit for yourself, then a Section 8 company is the way to go. The requirements here are different from an NBFC-MFI, generally simpler to meet.

• Non-Profit Objective: The biggest rule for a Section 8 company is that its main goal must be about helping society. This means promoting things like charity, education, social welfare, or even environmental protection. Any money the company earns must be put back into these social goals, not given as profits to the owners.
• No Minimum Capital: Unlike NBFC-MFIs, a Section 8 company does not need to show a minimum amount of starting money like a ₹5 crore NOF. This makes it a much more accessible option for individuals or groups who want to make a social impact without needing huge starting funds.
• No Prior RBI Approval: For micro-credit activities, Section 8 companies usually don't need a special license or approval from the RBI, especially if their total assets are below a certain size. Their main regulator is the Ministry of Corporate Affairs (MCA).
• Director Requirements: A Section 8 company needs at least two directors, and at least one of them must be a resident of India. The directors are key to ensuring the company stays true to its non-profit mission.

Setting up an NBFC-MFI might seem like a lot, but by following each stage carefully, you can achieve your goal. This process ensures your company is strong and follows all the important rules.

Step 1: Register a Private or Public Limited Company

Your first big step is to create a company under India's company laws, specifically the Companies Act, 2013. You can choose to form either a Private Limited or a Public Limited Company. This part involves getting special digital signatures (DSC) and identification numbers (DIN) for all your directors. Then, you'll pick a unique name for your company and get it approved. After that, you'll prepare important papers like the Memorandum of Association (MOA) and Articles of Association (AOA). These documents explain what your company will do and how it will run. Finally, you submit all these papers online. Once approved, you get a Certificate of Incorporation, which is like your company's birth certificate, along with its PAN and TAN numbers.

Step 2: Arrange the Minimum Net Owned Fund (NOF) of ₹5 Crore

After your company is officially born, the next major step is to gather a specific amount of money. This is called the "Net Owned Fund" (NOF). For most parts of India, you need to have at least ₹5 crore. If your company is in one of the Northeastern states, this amount is ₹2 crore. This money needs to be real cash that your company owns. It shows the RBI that your company is financially stable and ready for business. Think of it as a strong base for your operations.

Step 3: Deposit the NOF and Get a 'No Lien' Certificate

Once you have the ₹5 crore (or ₹2 crore) for your NOF, you must deposit this entire amount into a fixed deposit account in a bank. It is crucial to obtain a 'No Lien' certificate from the bank for this deposit. This certificate must clearly state that the deposit is "free from any lien." This simply means that this money is not used as a guarantee for any other loan, and it's completely available to your company. This certificate proves to the RBI that your funds are genuinely there and ready to be used for microfinance activities.

Step 4: Apply Online for the RBI License

Now comes the most important part: applying for your license from the Reserve Bank of India (RBI). You'll do this online through the RBI's special portal called COSMOS. You will need to fill out detailed forms and upload many documents. These include your full business plan, financial records, and identity papers for all your directors. The RBI wants to understand exactly how you plan to run your microfinance business and how you will manage risks.

Step 5: Submit Hard Copies to the RBI Regional Office

After you finish your online application, you still need to send physical copies of all those documents to the regional RBI office. They will then look at your application very carefully. They might even ask you more questions or ask for extra information. If everything is perfect and they are happy with your plans, the RBI will finally give you the Certificate of Registration (CoR). This certificate is your official permission to start operating as an NBFC-MFI. This whole process can take several months, so patience is key!

Starting a Section 8 company for micro-credit means setting up a non-profit company that gives small loans to people in need. Here’s a step-by-step guide to registering your company legally in India.

Step 1: Get DSC and DIN

The first step is getting a Digital Signature Certificate and a Director Identification Number.

• DSC works like a digital version of your signature. You’ll need it to sign forms online.
• DIN is a unique number given to each director. It’s like an ID card for people who want to run a company.

All directors must get both before moving ahead with registration.

Step 2: Choose and Reserve Your Company Name

Pick a name that shows your company helps society. Words like Foundation, Council, or Society work well.

Use the RUN (Reserve Unique Name) service on the MCA website to check if your name is available and to book it. Keep 2–3 name options ready in case your first choice is taken.

Step 3: Apply for Section 8 License (Form INC-12)

This step is only for Section 8 companies.

Fill out Form INC-12 to get a license from the Central Government. You also need to attach:

• A draft of your Memorandum of Association (MOA) and Articles of Association (AOA). These show that your company has non-profit goals.
• A 3-year plan showing what your company will do.
• An estimate of your future income and spending.

This proves that your company truly wants to help others.

Step 4: File for Incorporation Using SPICe+ Form

After getting the license, fill out the SPICe+ form. This online form helps you apply for:

• Company Registration
• PAN (Permanent Account Number)
• TAN (Tax Deduction Number)

You’ll also submit:

• The approved MOA and AOA
• Director’s consent letters (Form DIR-2)
• Declarations (Form INC-9)
• Proof of office address, like a rent agreement or an electricity bill

Step 5: Receive Certificate of Incorporation, PAN & TAN

Once the Registrar of Companies (ROC) checks and approves your documents, you’ll get:

• Certificate of Incorporation: Proof that your company is now legally registered
• PAN and TAN: These are needed for handling taxes

Now your microfinance company is ready to begin operations!

A complete and accurate set of documents is essential for a smooth registration process. The required documents are categorized below.

Documents for All Directors and Shareholders

For everyone who will be a director or an owner (shareholder) in your company, you will need to provide some personal documents. These help prove who they are and where they live.

• PAN Card: This is very important for all Indian directors and shareholders. It's like their special tax ID number.
• Aadhaar Card: For Indian directors and shareholders, this is key proof of their identity and home address.
• Passport: If any of your directors are from another country, their passport is a must-have document.
• Proof of Home Address: You will need a recent document that shows your home address. This could be a bank statement, an electricity bill, a phone bill, or a mobile bill. Make sure it's not older than two months when you apply.
• Passport-sized Photos: You'll need a few recent color photos of each director and shareholder.
• Email ID and Phone Number: These are needed for official messages and to set up your online accounts during the registration process.

Documents for the Company's Main Office Address

Your company needs an official address where it will be registered. Even if your business starts small, you must show proof of this place.

• No Objection Certificate (NOC): If you are renting your office space, you'll need a letter from the landlord. This letter should say they are okay with your company being registered at their address.
• Rental Agreement/Lease Document: If you are renting the office, you'll need a copy of the agreement you signed with the landlord.
• Electricity Bill/Utility Bill: To prove that the address is being used, you'll need a recent electricity bill, gas bill, or water bill for that property. This bill should also not be older than two months.
• Sale Deed/Property Papers: If the office property belongs to the company itself or one of its directors, then you'll need copies of the official papers that show who owns the property.

Company and RBI-Specific Documents (for NBFC-MFI)

If you are registering an NBFC-MFI (the type of microfinance company that aims to make a profit), you will need extra papers specifically for the RBI application. These are added to the general papers needed for setting up any company.

• Company's Legal Papers (Certificate of Incorporation, MOA, AOA): These are the main legal documents of your company. You get them when you first register your company.
• Audited Financial Reports: You'll need financial reports for your company and its main owners (promoters/directors) from the last three years. These reports must be checked by a professional accountant. They show your financial history.
• Banker's Letter: This is a very important paper from your bank. It confirms that your Net Owned Fund (NOF) has been deposited. It must also clearly state that this money is "free from any lien." This means the money isn't tied up as security for any other loan.
• Board Resolutions: These are formal decisions made by your company's directors. They specifically state that your directors plan to apply for an NBFC license from the RBI.
• Detailed Business Plan: The RBI wants to see a clear plan of how your microfinance company will work. This includes who you will lend money to, how you will manage your loans, how much money you expect to make, and how you will handle any risks.
• System Audit Report: For bigger NBFCs, a report on your computer systems might be needed. This shows that your technology is safe and works well.
• KYC Policy: You must have a "Know Your Customer" (KYC) policy. These are rules that explain how your company will properly identify and check its customers. This helps prevent illegal activities like money laundering.
• Fair Practices Code: This document explains how your company will treat its customers honestly and fairly. It covers things like how interest rates are set, how loans are given out, and how customer complaints will be handled.

The costs involved depend heavily on the legal structure you choose. We'll look at the fees and the main money you need for both types.

Cost for Section 8 Micro-Credit Company

If you choose to start a Section 8 company to offer micro-credit, the costs are much lower. This is because you don't need a huge amount of starting money like the other type of company.

• Government Fees: These are the charges you pay to the government for different steps. For example, getting a digital signature for directors might cost around ₹2,000 to ₹4,000 per person. Getting a director ID number is usually about ₹500. Naming your company costs ₹1,000. And applying for the special Section 8 license usually costs between ₹2,000 and ₹3,000. The fees for officially registering the company itself vary, but they are generally a few thousand rupees. You also pay a small amount called stamp duty, which depends on where you live.
• Professional Fees: You might want to hire experts like lawyers or accountants to help with all the paperwork. Their fees can range from about ₹20,000 to ₹50,000 or more, depending on how much help you need.

So, without including expert help, government fees for a Section 8 company are usually just ₹5,000 to ₹10,000. If you add in expert help, the total cost might be around ₹25,000 to ₹60,000.

Costs for an NBFC-MFI

Starting an NBFC-MFI, which is a for-profit kind of microfinance company, costs a lot more. This is mainly because of the large amount of money you need to have set aside.

• Application Fee: When you apply for your license from the RBI, there's a fee you must pay. This fee is currently ₹3,00,000, and you don't get it back even if your application isn't approved.
• Minimum Capital (NOF): This is the biggest money requirement. You need to have a "Net Owned Fund" (NOF) of ₹5 crore. This is money your company must truly own and keep. If your company is in a Northeastern state of India, this amount is ₹2 crore. This isn't a fee you pay to someone, but money you must have in your company's bank account.

Section 8 companies must follow RBI's fair lending norms, even though they don’t need a direct RBI license.

Key Guidelines:

• No RBI License Required: Section 8 microfinance companies do not need a direct RBI license to operate. However, they cannot lend from their funds or raise public deposits unless registered as an NBFC.
• Mandatory Compliance: Despite no license, they must follow the RBI’s regulatory framework and ethical lending standards.
• Fair Practices Code:
  • Must disclose interest rates and loan terms clearly.
  • Should have transparent grievance redressal systems.
  • Avoid hidden charges and misleading practices.
• Interest Rate Norms:
  • Not strictly bound by NBFC-MFI rate caps.
  • However, interest charged must be fair, reasonable, and non-exploitative.
    Loan Limits Per Household:
    • Rural households: Annual income should not exceed ₹3,00,000.
    • Urban/Semi-urban households: Annual income should not exceed ₹3,00,000.

The aggregate loan limit per household is ₹1,25,000 initially, which can go up to ₹2,00,000 based on borrower history and repayment capacity.

• No Public Deposits:
  • Section 8 MFIs are not allowed to accept deposits from the general public.
  • Funding generally comes from grants, donations, or institutional loans.

Section 8 companies have some really good benefits, especially if you want to help people and not just make money. They come with fewer strict rules compared to NBFC-MFIs.

• No Profit Goal: Their main aim is not to earn money for the owners. Any extra money they make must go back into helping people achieve their social goals.
• No RBI License Needed (Usually): This makes starting the company much easier. You avoid the long and complicated process of getting a direct license from the RBI.
• No Minimum Capital Needed: This is a big advantage! You don't need to show a large amount of starting money. This makes it possible for more people to start a micro-credit service.
• Tax Benefits: Section 8 companies can get special tax breaks from the government. This means they can save money on taxes, which they can then use to help even more people.
• Easier Rules to Follow: Compared to NBFC-MFIs, the ongoing rules and paperwork are simpler. They mainly follow rules from the Ministry of Corporate Affairs.
• Can Get Donations: Because they are non-profit, Section 8 companies can receive donations and grants from other organizations or individuals. This helps them fund their good work.